Pricing of volume-weighted average options: Analytical approximations and numerical results

Novikov, AA; Ling, TG; Kordzakhia, N

Pricing of volume-weighted average options: Analytical approximations and numerical results

Novikov, AA

Ling, TG Kordzakhia, N

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Publication Type:: Chapter
Citation:: Inspired by Finance: The Musiela Festschrift, 2014, pp. 461 - 474
Issue Date:: 2014-01-01

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Field	Value	Language
dc.contributor.author	Novikov, AA https://orcid.org/0000-0001-8529-173X	en_US
dc.contributor.author	Ling, TG	en_US
dc.contributor.author	Kordzakhia, N	en_US
dc.date.issued	2014-01-01	en_US
dc.identifier.citation	Inspired by Finance: The Musiela Festschrift, 2014, pp. 461 - 474	en_US
dc.identifier.isbn	3319020684	en_US
dc.identifier.isbn	9783319020686	en_US
dc.identifier.uri	http://hdl.handle.net/10453/35686
dc.description.abstract	© Springer International Publishing Switzerland 2014. All rights are reserved. The volume weighted average price (VWAP) over rolling number of days in the averaging period is used as a benchmark price by market participants and can be regarded as an estimate for the price that a passive trader will pay to purchase securities in a market. The VWAP is commonly used in brokerage houses as a quantitative trading tool and also appears in Australian taxation law to specify the price of share-buybacks of publically-listed companies. Most of the existing literature on VWAP focuses on strategies and algorithms to acquire market securities at a price as close as possible to VWAP. In our setup the volume process is modeled via a shifted squared Ornstein-Uhlenbeck process and a geometric Brownian motion is used to model the asset price. We derive the analytical formulae for moments of VWAP and then use the moment matching approach to approximate a distribution of VWAP. Numerical results for moments of VWAP and call-option prices have been verified by Monte Carlo simulations.	en_US
dc.relation.ispartof	Inspired by Finance: The Musiela Festschrift	en_US
dc.relation.isbasedon	10.1007/978-3-319-02069-3_21	en_US
dc.title	Pricing of volume-weighted average options: Analytical approximations and numerical results	en_US
dc.type	Chapter
utslib.for	150201 Finance	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US

Abstract:

© Springer International Publishing Switzerland 2014. All rights are reserved. The volume weighted average price (VWAP) over rolling number of days in the averaging period is used as a benchmark price by market participants and can be regarded as an estimate for the price that a passive trader will pay to purchase securities in a market. The VWAP is commonly used in brokerage houses as a quantitative trading tool and also appears in Australian taxation law to specify the price of share-buybacks of publically-listed companies. Most of the existing literature on VWAP focuses on strategies and algorithms to acquire market securities at a price as close as possible to VWAP. In our setup the volume process is modeled via a shifted squared Ornstein-Uhlenbeck process and a geometric Brownian motion is used to model the asset price. We derive the analytical formulae for moments of VWAP and then use the moment matching approach to approximate a distribution of VWAP. Numerical results for moments of VWAP and call-option prices have been verified by Monte Carlo simulations.

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http://hdl.handle.net/10453/35686